With a certain amount of fanfare, the California Legislature has expanded the
State's Anti-Indemnity Statute to provide additional protections to residential
subcontractors. Although the neWstatute, found in California Civil Code section 2782,
will provide some relief, that relief is likely to be limited in its impact.
California's indemnity statute, portions of which date back to 1872,has been
applied in a broad variety of insurance and non-insurance contexts. Until 2006,the only
prohibition or anti-indemnity provision in the statute for contracts with private persons
or entities was contained in Civil Code section 2782(a)which prohibited indemnitees
(parties claiming indemnity rights) in construction contracts from being defended or
indemnified for their sole negligence or willful misconduct. In 2005, the State
Legislature revised Civil Code section 2782to add new sub parts Civil Code sections
2782(c)and (d) which preclude builders in residential construction contracts from being
defended or indemnified for claims which arise from the work of others. The new sub
parts became effective January I, 2006 and apply to residential construction contracts
entered into after January I, 2006. The anti-indemnity statute was further revised,
effective January I, 2008,by the enactment of Civil Code section 2782(e)so that general
contractors, just as with residential builders, are precluded from obtaining indemnity
and a defense from a subcontractor for claims arising from the work of others (that sub
part applies to residential contracts entered into after January I, 2008). The antiindemnity
statute has now been further revised, effective January I, 2009,so that the
subcontractor will have defined periods of time to act and will face additional
consequences for failing to so act.
This new scheme, while relatively welcome news for subcontractors, has had
little practical impact so far because it only applies to contracts entered into after
January I, 2006,at the earliest (and most suits to date deal with residential construction
contracts entered into before that date). However, even with the passage of time and
the revisions effective January I, 2008and January I, 2009,the revisions to the antiindemnity
statute may have relatively minimal impact and could even pose additional
burdens on subcontractors.
This is so for a number of reasons.
First, Civil Code section 2782(c)(as revised in 2006 and 2008 and to be revised in
2009)contains a provision providing that it will not apply to the obligations of an
insurance carrier under Presley Homes, Inc. v. American States Insurance Company
(2001)90 Cal.App.4th 57 (which applies a broad scope of defense to any lIadditional
insured IIinsurer). Second, under Civil Code section 2778(d) (as revised in 2006and
2008and to be revised in 2009), the subcontractor may enter into an agreement (and
undoubtedly will be so required) to mutually agree as to the timing or immediacy of
defense and reimbursement of defense fees and costs (so long as the limitation on scope
of the indemnity obligation is not waived). That sub-part (as revised effective in 2009)
further provides that, upon a written tender, the subcontractor will have the option of:
1. within 90 days of tender agreeing to defend the claim with counsel of its
choice for claims arising from the subcontractor's work; and
2. within 30 days of receipt of an invoice, agreeing to a reasonable allocated
share of the builder/ general contractor's defense costs.
Moreover, if the subcontractor fails in its obligations with respect to a IIprovide~ forll
defense under pending Civil Code section 2782(d)(l), it can be pursued for compensatory
damages, consequential damages and attorney's fees. If the subcontractor fails in its
obligations under the IIshareddefenselloption under pending Civil Code section 2782(d)(2),
it can be pursued for compensatory damages, consequential damages, attorney's fees and
interest at the rate of two (2) percent per month under the prompt pay statute found in
Civil Code section 3260. The only saving grace is that, within 30 days of resolution of the
claim, the subcontractor can pursue a claim if the developer/general contractor fails to
reallocate to accord with the statutory limit as to scope of defense.
In summary, while certainly of interest to residential subcontractors in California,
the revisions to California's anti-indemnity statute may have limited impacts given that it
provides no direct relief to insurers providing additional insured endorsements and
essentially only abridges the allocable defense obligation which can be imposed on a
subcontractor. Also, the pending revisions to the new statute provide for a direct action
against the subcontractor for failure to provide a defense or join in a defense and even
contains new penalties for failure to defend. Therefore, while close scrutiny should be paid
to the statute, its actual impacts remain to be determined.
About the Authors: Edward F. Morrison, Jr. is the founding partner and Christina S.
Karayan is a senior associate of The Morrison Law Group, a professional corporation.
Their biographies can be viewed at www.morrisonlawgroup.com.